REL: 1400 HRS Rakon Limited
MEETING: RAK: Rakon Annual Meeting Addresses from the Chairman and MD
RAKON LIMITED ASM 10 AUGUST 2007
Addresses by the Chairman and the Managing Director at Rakons' ASM held at
2pm 10 August 2007 are shown below:
As detailed in our annual report, our 2007 fiscal year and our first as a
listed company produced very pleasing results.
Your company's net surplus after tax was 47% ahead of our Prospectus forecast
and 122% ahead of the 2006 fiscal year's results.
Well that is all in the past and I suspect you are here today to gather an
insight into how Rakon is travelling this financial year and to improve your
knowledge of the company's capabilities and the Board's approach to
utilizing those capabilities to maximize shareholder value.
Our goal from day one has been to build a global business based upon the
unique skills, designs, energy, and processes Rakon has developed over the
Rakon as you know has its business based upon quartz crystal technology,
utilizing the known vibrations of the quartz molecule to create the world's
leading frequency control or timing devices for a wide range of applications
To understand the Quartz Crystal business, at its very basic, it is important
to recognize that virtually everything electronic requires some sort of
timing device in order for it to operate. This timing device can act like a
human heart in an electronic circuit, pumping information around a circuit;
it allows microprocessors to work and computers to function; it can be used
to encode and decode simple or complex signals, enabling us to communicate
with one another; it can even help us to tell the time.
The scope and scale of the need for such timing or frequency control devices
is really only limited by the boundaries of man-kind's imagination.
By way of background I will read to you a couple of paragraphs from a
comprehensive article in the April 28th issue of the Economist this year
entitled "When everything connects" an article I thoroughly recommend.
The opening paragraphs read;
"The wireless was once a big wood-panelled machine glowing faintly in the
corner of the living room. Today's wireless device is the sleek mobile phone
nestling in your pocket. In coming years wireless will vanish from view, as
communications chips are embedded in a host of everyday objects. Such chips,
and networks that link then together, could yet prove to be the most potent
wireless of them all.
Just as microprocessors have been built into everything in the past decades,
so wireless communications will become part of objects big or small. The
possibilities are legion. Gizmos and gadgets will talk to other devices-and
be serviced and upgraded from afar. Sensors on buildings and bridges will run
them efficiently and ensure that they are safe. Wireless systems on farmland
will measure temperature and humidity and control irrigation systems. Tags
will certify the origins and distribution of food and medicines. Tiny chips
on or in people's bodies will send vital signs to clinics to help keep them
The closing paragraph reads;
"What is different about new wireless communications is that people will
barely notice them. Machines will talk to machines without human
intervention. But humans will nevertheless be laying the foundation of a new
infrastructure which, like the electrical power grid, will become a platform
for subsequent innovation. There is no saying how it will be used other than
that it will surprise us."
This "wirelessness" is what gives your Directors considerable confidence
about the opportunities for growth that our technologies and energies can
harvest for the future. And as the economist points out many of the
applications that will use our products are as yet unknown. Our belief is
that our creations based on quartz will remain at the centre of all this
growth and change.
Naturally our challenge is to maintain a strong market position within
exiting and emerging markets and our belief is that market demand will always
migrate toward higher quality, whether it is consumer markets or specialist
applications. Mankind never likes to sit still and remain satisfied with the
status quo, there is a continual drive for improvement. As well we believe
that the speed with which specialized ideas migrate to general consumer
markets will continue to increase and along with that driver comes the demand
for more volume and lower prices, plus of course the consistent demand for
Rakon's proprietary manufacturing systems are firmly aimed at always
achieving these goals and to date we have been able to stay sufficiently
ahead of the competition. Our systems coupled with creative design and ideas
about where market trends will lead is what gives us our Global competitive
Our acquisition of FCP earlier this year not only doubled our revenue but it
was aimed at enhancing and broadening our competitive edge by providing us
1. Access to wider global markets, especially telecommunications
2. A deeper pool of Research and development skills. We went from having
over 80 qualified engineers employed before the acquisition to over 100 and
similarly we went from 3 PhD's to 9
3. A larger global sales footprint.
I have mentioned our Global aspirations a lot, and it was very interesting to
note that during our successful capital raising for the purchase of FCP that
not only were we many times over subscribed but we had significant offers of
money from overseas investors. Highlighting that being listed on the New
Zealand Stock exchange doesn't necessarily limit our access to global funds.
As regards the current financial year the business is currently travelling on
line with our budget as regards results in US dollars and is forecast to
continue to do so. Given that the Kiwi USD cross rate has been persistently
above our forecast rate of 70 cents this may negatively impact our reported
profit for the full year depending upon where it lands as an average over the
full 12 months.
For the first quarter our hedging strategies have kept the NZ dollar amounts
in line with plan but as we have maintained those hedging strategies at the
lower ends of our FX policy settings (taking the view that the Kiwi is over
valued and will retrace some of its currently over-inflated position) we will
be taking largely what the market delivers for the remainder of the financial
year. We have previously stated that every 1 cent movement in the Kiwi USD
cross rate has an impact of approximately NZ$1.5m EBITDA. It is important to
note however that as we have anticipated capital expenditure in Asia in the
not too distant future (in USD) our hedge position as regards our cash is
effectively covered 100% for the full year; it is the translation of profits
into NZ dollars that is impacted.
Having said this about the Kiwi dollar, our over all view is that we are
better to assume the Kiwi will remain at levels much higher than previously
considered normal and adjust our efficiencies upward to compensate. Pursuing
this strategy should ensure improving operating profits for now or when the
Kiwi retraces if it does.
Finally I would like to pay tribute to our team at Rakon. We now have over
800 team members around the world. Building a successful Global business from
New Zealand is not an easy task. It requires a lot of commitment in time and
often absence from home and family.
Your Directors have enjoyed the challenges of this our first year and look
forward to the larger challenges of building our expanding business in the
I would now like to pass over to our Managing Director Brent Robinson.
Managing Directors Address
Good afternoon and welcome to Rakon's second annual shareholder meeting.
The 15 months since our IPO have gone quickly and have been very exciting for
us. We have worked hard to achieve the goals we set for ourselves a year
ago, we have taken advantage of some new opportunities and delivered what I
believe are some excellent results.
Rakon can now consider its self a truly global organisation. With your
assistance we have been able to expand our presence, adding an additional 250
staff in Europe and now have engineering and manufacturing in the UK and
France as well as New Zealand. We also have sales offices in Beijing,
Shanghai, Shenzhen, Taipei, Penang, Tokyo, Chicago, Durham, Paris, Crewkerne
The March 2007 financial year was a significant milestone for Rakon.
Operating revenue pushed through the $100 million mark to reach NZ$106.2
million, a 43% increase over the prior year. NZ$ revenue has grown at an
average compound rate of 25% since 2002 and if we eliminate the impact of the
stronger NZ$ the underlying average growth rate over this period is 37%.
Earnings before interest and tax (EBIT) were $16.5m, up 85% on the prior year
and net surplus after tax was $10.6m, up 122% on last year. Since 2002 EBIT
has grown at a compound average rate of 69%.
The growth in last years earnings, and earnings over the past 5 years, have
not only come from top line revenue growth, but also from new lower cost
product designs, lower material costs and business efficiencies achieved by
production volume growth. Continued investment and improvement in equipment
performance and process automation has also been an important factor.
The end of the financial year coincided with our acquisition of the European
based frequency control products division of C-MAC MicroTechnology. As Bryan
alluded to in his introduction this acquisition was strategically important
for us as it gave us a number of immediate benefits which would have
otherwise taken many years for us to achieve alone.
I am pleased to say that in the months since the acquisition everything has
gone as we expected. The new members of the team remain positive and
enthusiastic about being part of the Rakon family and we are continuing to
work to fully integrate ourselves and take advantage of the synergies that
Although we are now able to offer a much broader range of products for
different applications Rakon continues to specialise in servicing markets
which require high performance timing references.
For the last 16 years that has largely been the GPS market, although with the
acquisition we now have the people, products and very importantly the
relationships to address a wider range of wireless and communications
GPS remains an extremely important part of our business with over 50% of our
sales still going into GPS applications. The major Personal Navigation
Device manufacturers such as Garmin, Tom Tom and Mitac are forecasting in
excess of 70% volume growth in 2007, with Garmin recently reporting the PND
market could reach up to 10M units in the US this year and Europe in excess
Rakon remains the only high volume TCXO manufacturer capable of screening
products at a high enough resolution to eliminate small anomalies in the
frequency output, which is critical for GPS applications.
2007 has also been the year where we have finally started to see meaningful
adoption of GPS into cellular phones. Although the volumes are still very
small it is encouraging to see companies such as Nokia and Research In Motion
start to adopt GPS as a feature in their top end models. In China there is
great interest from second tier phone manufacturers to adopt GPS into smart
and feature phones; we see a lot of potential in this market for us in coming
Rakon has recently released our latest generation GPS grade TCXO, the IT2200.
This product is over 35% smaller than our previous smallest model, a mere
2.0 x 2.5mm and less than 0.9mm high. The difficulty in making these
products smaller is that you normally need to reduce performance. Rakon
continues to follow a policy of not sacrificing performance as we continually
reduce size and cost. This policy is well respected by our customers.
The other main GPS product which we have released is the GPS RF Front End
Module, or 'GRM'. The GRM is a product targeted at manufacturers of consumer
electronics who do not have a depth of GPS design experience. We are working
closely with a number of equipment manufacturers in Asia and expect to be
seeing some relatively strong uptake of modules later this year.
Our Argenteuil facility in France specialises in high performance OCXO's,
mainly for the cellular basestation market. We have been experiencing very
high demand in this sector, driven largely by the continued roll out of third
generation cellular networks in China. China has committed to complete 3G
coverage in all tourist area's before the Beijing Olympics.
In order to meet this high demand, and to remain cost competitive we have
been looking at adding some OCXO manufacturing capacity to our Auckland
plant, to compliment what we are doing in France.
Rakon has also been investing effort in addressing the timing needs for the
emerging Femto-cell market, also called home basestations. We see this as a
market that is particularly well suited to our products and expertise.
The Femto market requires a frequency timing reference nearly as good as
those used in cellular base stations. These frequency references, typically
OCXO's, cost in the region of 50-100 US dollars each. For the Femto-cell
market to be viable the frequency reference price needs to come down
Rakon has solutions with our Pluto, Barracuda and Triton product ranges which
are able to meet the femto-cell specification at a fraction of the cost of
high performance OCXO's.
We are working closely with all the major hardware providers to assist them
in developing commercially viable solutions. ABI research estimates that as
many as 32 million Femto-cells could be deployed by 2011 and Rakon would be
well positioned to capitalise on this.
One of the major projects we embarked on after the IPO was the expansion of
our crystal clean room capacity. In January of this year we successfully
completed stage one of the expansion which enabled us to increase our
processing capacity by 50% to 3 million units/ month, as well as allowing us
to begin manufacturing the next generation of miniature crystals. A second
stage expansion has been allowed for which will increase capacity by a
further30% to 4 million units/ month, this second stage will likely be
started in 2008. These manufactured crystals provide about 50% of our TCXO
requirement - the balance we purchase from third parties.
For some time now we have been talking about our 4th generation testing oven.
Our 3rd generation system is still in our opinion years ahead of our
competition in its ability to test up to 12,000 units at a time to a very
high resolution. Our 4th generation system will be able to process 23,000
units per hour and therefore enable us to significantly increase our testing
capacity. I am very happy to announce that the 4th generation oven is
currently going through pre-production trials and will be released for volume
production well in advance of our peak demand season in October/November.
As you know Rakon has for some time been exploring options for expanding our
manufacturing capability into China. For many years we have maintained an
international manufacturing model with various parts of the assembly of our
products being undertaken in Asia. We see direct investment into this region
a natural progression and important if we are to maintain a competitive cost.
It is also becoming more and more important that we geographically position
ourselves close to our customers and right on the doorstep of what is a
Rakon plans to build a new facility in southern China with a partner whom is
part of our existing supply chain. We have largely completed due diligence
activity and expect to lodge an application for land use consent at the end
of the month with building to commence before the end of this calendar year.
As a result of this initiative it may be mistakenly reported that Rakon is
shutting up shop and moving manufacturing to China, I would like to clearly
state that this is not the case. Our move into China is an expansion of our
current global facilities, our New Zealand, UK and French manufacturing
operations remain strategically important to Rakon and will continue to be
expanded and developed as required to meet changes in demand.
FINANCIAL YEAR 2008 OUTLOOK
To close I'd like to give you an update on our YTD performance and outlook
for the balance of the March 2008 year.
The overall underlying performance in the YTD is in line with expectations.
Demand for GPS grade TCXOs continues to grow strongly, underpinned by
increasing consumer demand for GPS devices, in particular personal navigation
Demand for our ultrastable TCXOs manufactured in NZ and the UK is a steady
and a strong contributor to earnings.
Demand for OCXO products manufactured in France has been stronger than
expected due to the rollout of new infrastructure in China, although the high
cost base in France means this has limited impact on earnings.
As you know in the last few months the NZ$ has reached record levels against
the US$. In the YTD this has been largely offset by hedging arrangements we
had in place, however we do not have the same level of protection for the
balance of the year. As Bryan has noted we forecast our US$ cash flow to be
naturally hedged by the timing of our planned investment into China in the
second half of the year, so we have limited requirement for forward exchange
cover over this time.
At the time of release of our full year 2007 result we projected EBITDA of
NZ$32 to NZ$38 million for the 2008 year. This was based on the assumption of
an average exchange rate of 70 cents against the US$, we highlighted at the
time that the impact of a one cent movement in the exchange rate could have a
full year impact of approximately NZ$1.5 million on EBITDA. Should the Kiwi
hold at its current rate of around USD $0.76 then our projected EBITDA range
would be $27 to $32 million.
Our expectations for the underlying performance of our business are unchanged
from the beginning of the year, markets are good, our products well
positioned and our people focused on delivering planned growth.
End CA:00151975 For:RAK Type:MEETING Time:2007-08-10:14:00:14